This weekend, President Obama will be in Canada for G-20 summit meetings of the largest world economies. There, the U.S. agenda will focus on a number of international issues, but among the most important will be encouraging other countries not to precipitously adopt austerity policies. "We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth," Obama's top economic advisers wrote yesterday. "Without growth now, deficits will rise further and undermine future growth."
The problem, though, is that many major countries are beginning to consolidate their economies. The divide isn't, as this The Hill writer inaccurately suggests, because Europeans worry about debt crises while the president worries about politics. There is a serious debate here over global economic policy, and cutting aggregate demand at this moment could be a very serious mistake. It's a question of interests, especially when it comes to export-oriented nations like Germany and China that rely on the rest of the world to purchase their goods and don't want to change that equation (ironically, though China hasn't exactly been cooperative, they've been less open in rejecting this idea than the Germans).
If Germany and other export-oriented countries refuse to engage in a macro-economic policy shift, we're likely to see more international bailouts as importing countries -- like the PIGS (Portugal, Italy, Greece, Spain) -- need to borrow more and more foreign currency to sustain their purchases from places like Germany. And they're borrowing from Germany and other European countries, further complicating the situation. Ironically, the country best positioned to take advantage of Keynesian stimulus is Germany, whose responsible budgeting makes it an ideal candidate for effective short-term stimulus and whose robust social-safety net makes targeting that stimulus relatively easy. Premier Angela Merkel's refusal to engage these ideas will likely backfire in some way thanks to the inextricable ties of the global economy.
Obama is shouldering the burden of arguing in favor of global stimulus at the international summit, in the hopes of avoiding a double-dip recession. Hopefully he'll be able to find some consensus to continue stimulus in the short-term until global capacity starts to rebuild.
-- Tim Fernholz
